Basics

What exactly is a foreclosure?
I have just received a notice of default. How much time do I have before my
house is forced into auction?
What options do I have if I am in foreclosure?
What is the credit impact of a foreclosure?
How will a foreclosure affect my ability to buy a house in the future?
What is are the steps of the foreclosure process?
What is the California foreclosure timeline?
What happens after an auction/trustee's sale?

Explore your options:

Loan forbearance
Loan modification
Mortgage reinstatement
Refinance
Deed in lieu of foreclosure
Short sale
Bankruptcy
Home Sale

When faced with a foreclosure, some things you may be able to do are:

1. Sell your home through a traditional sale if there is more than 10% equity (Click here to see how you can determine your home's equity)    
2. Bring your mortgage current by making the missed payments and paying the penalties
3. Select a foreclosure alternative (i.e. forbearance, loan modification, mortgage reinstatement, refinance, deed in lieu of foreclsoure, short sale, bankfruptcy).

If you have the ability to do the first two options, then it is probably best to attempt those first. They are usually the best and easiest solutions for a homeowner in foreclosure. However, if your situation is such that your house cannot be sold for the amount owed, you have no money to bring the payments current,and you have no equity to qualify for a refinance, you should consider a foreclosure alternative.

Step 1: PREFORECLOSURE--Homeowner is delinquent
The homeowner misses a payment on her loan, and after a grace period passes, she falls delinquent on the loan. Because they would prefer to not go through with foreclosure, most lenders are willing to work with the homeowner for a period of time, from 60 to 90 days, before going on to the next step of the foreclosure process.

Step 2: NOTICE OF DEFAULT--Lender files the default
After a certain period of time, the lender will not be willing to work with the homeowner. The lender files a notice of default (NOD), which is an official notice that foreclosure is imminent. It is possible for the borrower to reinstate the loan, and make up for the payment and late fees, bringing the mortgage up to date and stopping the foreclosure. However, if the homeowner does not do this, the foreclosure process continues to the next step.

Step 3: NOTICE OF TRUSTEE'S SALE--Lender sets up forced sale of property
With the homeowner's refusal to bring the payments current, the lender moves to prepare a forced sale of the property in what is known as a trustee's sale. During a trustee's sale, the house is auctioned off to the highest bidder. A homeowner, has up until five business days before the auction to reinstate the loan. After this deadline has passed, the delinquent homeowner must pay off the outstanding balance all at once in order to regain ownership of the property.

Step 4: TRUSTEE SALE--Public auction takes place
The trustee (bank) auctions off the property to the highest bidder. The value of the bid includes the mortgage, late fees, and other foreclosure costs. Buyers are required to pay in cash or certified funds, and if no one bids higher than the amount of money owed, then the bank keeps the property and it becomes an REO (real estate owned). However, if there is a qualified bid, then the trustee gives a new deed to the property to the new owner.

Step 5: REDEMPTION PERIOD--Buyer waits for redemption period to end
The redemption period is a length of time after the foreclosure auction where the foreclosed homeowner still has the ability to pay the full amount owed to the lender and regain ownership of the home. In California, the redemption period is either year after foreclosure sale, unless the original lender made a full price bid. In that case, then that period is shortened to three months. The buyer who purchased at auction must wait until this period is over to safely gain possession of the property.

Definition: A loan forbearance allows a homeowner to delay or reduce payments for a short period, allowing the homeowner to gather their assets in order to eventually bring their loan current. A lender, if in agreement, will temporarily cease legal actions. However, the homeowner will still be responsible for the repayment of the interest that accrues in the meantime.

Lenders allow you to reinstate the loan or structure a repayment plan if you know you can provide the needed funds to bring your account current by a specific date. This option often works for homeowners have just experienced a sudden living expense increase or income loss that is deemed recoverable.

Pro's: You can stay in house with a forbearance. If your lender is willing to work with you, you might be able to try and negotiate a loan forbearance by yourself at no cost. It is also possible to hire a negotiator to service your forbearance for a higher rate of success.

Cons: Some lenders will not consider this option after filing for default, but it may be worth trying. If you negotiate a loan forbearance yourself with your lender, there are no costs involved, but there is a lower chance that the lender will agree to altering your loan. Negotiators charge either a flat rate or require to be paid a percentage of the loan that they negotiate, usually whichever is the greater amount. These fees are often due upfront or within 30 days. There is a risk that the forbearance will not go through, that the forbearance is not feasible for the homeowner, and not all forbearance negotiators offer a refund if the modification is not approved.

Definition: A loan modification is a permanent change in one or more of the terms of a mortgagor's loan, allowing the loan to be reinstated, and results in a payment the mortgagor can afford.

Pro's: You can stay in house with a loan modification. If your lender is willing to work with you, you might be able to try and negotiate a loan modification by yourself at no cost. It is also possible to hire a negotiator to service your laon modification for a higher rate of success. If you cannot qualify because of insufficient hardship, you may be able to qualify for a loan modification if a servicer looks through your loan documents and finds that you are a victim of predatory lending.

Cons: The US Department of Treasury released a study in December 2008 that 55% of homeowners who receive loan modifications redefault within 6 months. If you negotiate a loan forbearance yourself with your lender, there are no costs involved, but there is a lower chance that the lender will agree to altering your loan. Negotiators charge either a flat rate or require to be paid a percentage of the loan that they negotiate, usually whichever is the greater amount. These fees are often due upfront or within 30 days. There is a risk that the modification will not go through, that the new modification terms is not feasible for the homeowner, and not all forbearance negotiators offer a refund if the modification is not approved.

Definition: Reinstating the mortgage involves catching up on delinquent payments by paying the sum in full. A reinstatement can only take place if all the late payments, including all the late fees, can be completely paid for at once. If a homeowner can get enough cash to bring mortgage payments up to date, the lender will most likely agree to hold off on foreclosure proceedings.

Pro's: The homeowner can stay in the home and retain ownership. It may be possible to potentially borrow from friends or family, credit cards or retirement program. One may also be able to arrange a second mortgage to catch up the back payments and fees.

Cons: If the homeowner is under extreme financial hardship and it is not realistically possible to pay the lender for all the missed payments in full, which is understandable if a homeowner is having difficulty making even one month’s payment, it would be best to explore a home sale or deed in lieu if there is enough equity. If the house has an upside-down, then a short sale would be the most beneficial solution.

Definition: A homeowner may be able to consolidate debt with a loan that actually lowers your total monthly payment to less than what is paid on all the other loans put together. This option depends on income, an excellent credit report, the value of your home, and the amount of your equity. If these factors are favorable, refinancing might be a good alternative.

Pros: More manageable payments.

Cons: One may only be making matters worse by unncessarily wasting precious time if one cannot reach now stringent refinance requirements. Even if factors are favorable for a refinance, the following are possible barriers to consider while attempting to refinance:

• With a refinance, where there is no demonstrated hardship, lenders usually chose to foreclose instead of losing more money by modifying a loan through this particular method.
• If you are in foreclosure, a lender will refuse to arrange new financing and will prefer to take their chances in a foreclosure auction.
• Second and third mortgage holders, who are likely receive next to nothing from a refinance, may be reluctant to agree to the refinanced loan.

Definition: This option allows homeowners to offer their lender the deed of their home in exchange for stopping the foreclosure. A deed in lieu is a last-resort solution suitable for homeowners who havesufficient equity in their homes.

However, if a homeowner with equity acts fast enough, he or she may be able to retain some of their equity by selling in a quick traditional sale to an investor who is willing to pay cash for the home.

Pros: Can simply and quickly stop foreclosure. A deed in lieu, if submitted in pre-foreclosure or early in the process) won’t impact a homeowner's credit as much as a full blown foreclosure.

Cons: Homeowners will have to walk away from their house and any equity. However, if the homes in one’s neighborhood have been declining in value, it is unlikely that the lender will accept a deed in lieu of foreclosure.Lenders will not accept a deed in lieu from a homeowner who owes more than the house is valued by the current market.

Definition: Short sales happen when there is not enough equity to sell a home and there is a demonstrated hardship on the homeowner’s part, so a lender agrees to accept less then what is owed on the loan.

Pros: A short sale is extremely appealing for a lender because it allows them to lose much less money in comparison to a foreclosure. You can minimize damage on your credit, buy another home in just 2 years, and pay no fees for a specialist to negotiate with your lender. You can check out more short sale benefits here.

Cons: Most lenders are unfortunately not interested in dealing directly with less experienced homeowners regarding a short sale. If a homeowner chooses a less skilled negotiator, their short sale might not be approved by the bank, their home will remain unsold, and foreclosure proceedings will resume.

Definition: Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court.

Pro's: A bankruptcy can halt a foreclosure for a month or two and rid a homeowner of other debt.

Cons: Although filing for bankruptcy can temporarily pause foreclosure, it will not stop a foreclosure. It can damage one's credit and is very costly to execute, especially when necessary legal fees are taken into account. Lenders consider bankruptcy or impending bankrupcy as a serious financial hardship, and are often willing to settle matters with a short sale. Seek first if you are considering filing for bankruptcy.

If there is sufficient equity in your home, you might want to consider selling your home, paying off your loan, and obtaining a more affordable place to live. Currently, it takes about four months to sell a house in Orange County. If you are in default already, time is of the essence, and unless you act quickly, you may run out of time and ruin your credit.

A home sale can only be recommended if a homeowner cannot prove financial hardship and the loan is at most 90% of the current value of the house-- agent commissions and closing costs, which can amount to roughly 8% of the home’s selling price, must also be taken into consideration. Because it is a buyer’s market, your home will realistically be priced comparably to short sales and foreclosure sales in your neighborhood from the last six months.

If you are in a legitimate financial hardship (where selling the home at fair market value would be less than the amount of your mortgage) only a short sale can help you.

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